Japan: Can Abe Deliver Reform?

British Embassy Tokyo

November 2013

Summary

Abenomics has entered a crucial phase, with key legislation implementing structural reform starting to be presented to the Diet.

Detail

Structural reform is the key “third arrow” of Abenomics. The monetary loosening and stimulus package ushered in by PM Abe have already had a strong initial effect on the Japanese economy – which is projected to grow at the fastest rate of any G7 economy this year. But both risk storing up problems for the future unless genuine and deep structural reforms open up the economy and deliver higher potential longer-term growth.

Abe launched an ambitious and wide-ranging Growth Strategy in June setting out his vision for reform. In response to some allegations that it lacked of detail , Abe announced that this autumn’s Diet session would be devoted to implementing the strategy. This government has lined up a series of notable reform bills including:

Agriculture: The government proposes to allow companies to lease agricultural land for large-scale production, and has identified measures to encourage consolidation of plots. It has also proposed moving away from the current subsidy system for rice, which inhibits production and exports.

Pharmaceuticals: The Growth Strategy envisaged allowing online sales of non-prescription drugs, and a draft bill has been published this week.

Civil service reform: Proposed reforms would strengthen Cabinet Office control over the careers of top civil servants, increase flexibility and introduce a new category of Ministerial advisors.

Industrial competitiveness: This bill would lighten regulation of Japanese industry and introduce new tax breaks e.g. for restructuring and R&D.

Special economic zones: A bill endorsed by Cabinet in early November would create new zones where deregulation would be accelerated and with special incentives to facilitate foreign and domestic investment.

Some have also floated potentially wider-reaching reforms, including on the traditionally taboo subject of labour markets. This will take longer, with legislation – possibly to increase flexibility for companies undergoing restructuring – more likely next year. TPP and other FTA negotiations have also fostered the sense that further deregulation is inevitable. Further work is underway on lowering Japan’s corporate tax rate (which is very high by international standards at an effective rate of 38.01% in Tokyo), and on a patent box regime.

Abe has delivered so far through a strong centralising approach, focussing discussion and decision-making around him and the Cabinet Office. But we have now moved into a phase where the broader civil service need to work up legislation and implement reforms. Line Ministries are sometimes said to be less attached to reform and to have strong ties to the groups – such as traditional industry and trade unions – which are most opposed.

Hiroshi Mikitani – an internet tycoon who has advised Abe on his reform package – openly criticised the government recently. He opposed the decision by the Health Ministry to exclude 24 popular medicines from the list of products that would be allowed to be sold on the internet, and urged Abe to overturn this. Similar opposition can be expected on the other bills in coming months as interest groups work to limit the scope of reform.

Meanwhile, public acceptance of the need for change continues to grow. Initial public opposition to joining TPP negotiations and increasing consumption tax levels has been turned around. A recent poll showed that for the first time the majority of citizens also recognise that reform of rice subsidies is necessary. This is particularly striking given the importance of rice in the national psyche. Successful reform on this would provide a key spur for driving through further changes.

Comment

Abe has correctly identified reform and the resurgence of the Japanese economy as central to his legacy. To succeed, he will now need to drive his reforms through the system.

Disclaimer

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